Sectoral price data and models of price setting

In the median sector, 100 percent of the long-run response of the sectoral price index to a sector-specific shock occurs in the month of the shock. The standard Calvo model and the standard sticky-information model can match this finding only under extreme assumptions concerning the profit-maximizin...

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Bibliographic Details
Published inJournal of monetary economics Vol. 56; no. Supp.; pp. S78 - S99
Main Authors Maćkowiak, Bartosz, Moench, Emanuel, Wiederholt, Mirko
Format Journal Article
LanguageEnglish
Published Elsevier B.V 01.10.2009
Subjects
Bayesian dynamic factor model
Bayesian method
Calvo model
Information
Menu cost
Modelling
Price formation
Price index
Profit maximization
Rational inattention
Sticky information
Variance
C11
D21
E31
Bayesian dynamic factor model
Calvo model
Sticky information
Menu cost
Rational inattention
D83
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Summary:In the median sector, 100 percent of the long-run response of the sectoral price index to a sector-specific shock occurs in the month of the shock. The standard Calvo model and the standard sticky-information model can match this finding only under extreme assumptions concerning the profit-maximizing price. The rational-inattention model of Maćkowiak and Wiederholt [2009a. Optimal sticky prices under rational inattention. American Economic Review 99, 769–803] can match this finding without an extreme assumption concerning the profit-maximizing price. Furthermore, there is little variation across sectors in the speed of response of sectoral price indexes to sector-specific shocks. The rational-inattention model matches this finding, while the Calvo model predicts too much cross-sectional variation.
Bibliography:ObjectType-Article-2
SourceType-Scholarly Journals-1
ObjectType-Feature-1
content type line 23
ISSN:0304-3932
1873-1295
DOI:10.1016/j.jmoneco.2009.06.012